Tuesday, December 02, 2008

Futures Market Still 100% Certain Fed Will Cut Short-Term Rates by At Least 50 Basis Points At or Before the December 16 Fed Meeting

Currently, the fed funds futures market is 40% certain the Fed will cut short-term rates by 75 basis points (0.75 percentage point) at or before the next Fed meeting. In other words, the market isn't too confident about a 75 basis point cut, believing (currently) that such an aggressive move is more unlikely than likely. The market is, however, 100% confident the Fed will cut rates by at least 50 basis points at or before the December 16TH Federal Open Market Committee (FOMC) monetary policy meeting.

In all likelihood, the following recent economic news has had at least some influence on the fed funds futures market:

The Business Cycle Dating Committee of the National Bureau of Economic Research has determined that the U.S. economy peaked back in December of 2007, which means that the United States entered into a recession at the beginning of 2008. Click here to view Friday's report.

Earlier today, the Institute for Supply Management (ISM) reported that its Purchasing Manager's Index (PMI) declined for the fifth straight month, from 38.9% for October to 36.2% for November. The last time the PMI was at similar lows was back in the spring of 1982. For the PMI, any figure above 50% suggests that, in general, the American manufacturing sector is expanding, while any figure below 50% suggests contraction for a particular month.

Here's a six month history of the PMI:

June 2008: 50.2%

July 2008: 50.0%

August 2008: 49.9%

September 2008: 43.5%

October 2008: 38.9%

November 2008: 36.2%

Also from today, the Federal Reserve reported the results of its latest, $150 billion money auction, also known as the Term Auction Facility. There were 80 bidders. The Fed did not disclose the number of loans awarded via this auction, but the awarded loans will mature on February 26, 2009 and will have an interest rate of 0.42% associated with them.

Last Wednesday, the Commerce Department reported that sales of newly built homes fell by 5.3% during October 2008, and were down by 40.1% for the October 2007 - October 2008 period. The median price for a newly built home fell to $218,000, while the average price slid to $272,300. Click here for historical prices and a chart.

Two Mondays ago, the National Association of Realtors®reported that sales of used homes declined by 3.1% during October 2008. The median cost for a preowned home fell to $183,300 (down 11.3% from October 2007), while the average price for a previously occupied home fell to $224,700 (down 11.9% from October 2007.) Click here for historical prices and a chart.

Last Wednesday, the Commerce Department reported that consumer spending fell by 1.0% during October 2008, the fifth straight decline for this metric.

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As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 100% (as implied by current pricing on contracts) that the FOMC will vote to cut the benchmark Federal Funds Target Rate by at least 50 basis points (0.50 percentage point) at or before the December 16TH, 2008 monetary policy meeting.

Summary of the Latest Prime Rate Forecast:

Current odds that the Prime Rate will be cut by at least 50 basis points at or before the December 16TH, 2008 FOMC monetary policy meeting: 100% (certain)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

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